Share |

The changing face of family business in India

The centre of the Indian social identity is the family. In many cases, the family not only tells you who you are but also what you do. Thus, family businesses are not merely economic structures; for most business community individuals, the business is the source of their social identity. Furthermore, the family and the business are not treated separately. The boundaries of essentially two different systems, family and business – with distinctive rules governing their respective behaviours – overlap within the business house. While the exclusive dynamics of family culture and relationships have been imposed on the internal logic of managing a business enterprise, business relations have been allowed to play a role in governing relationships within the family.

The result has not always been a happy one. As professionally managed companies enter the marketplace, bringing with them a high degree of competitiveness, the Indian family managed business (FMB) finds itself under threat. A series of vital choices over its future role confront the Indian FMB if it is to thrive, perhaps even survive. Given that in India, more than 70% of businesses are family-owned, the problem is alarming. Therefore, while India's business houses cope with the inevitable need to bring about rapid strategic, operational and financial transformation in their business, they need to add one more item to the agenda: rewriting the role of the family in business in the given present economic scenario.

The next generation
The new generation of entrepreneurs is playing a significant role in changing the face of FMBs in India. Scions in their 20s and 30s equipped with skills obtained from foreign business universities and professional institutions have joined the family business, impatient to implement changes to their businesses on a par with international standards and to compete with the best. In many cases, their approaches conflict with the way the family has managed its business until now. A further complication is the 'heiress factor': daughters and sometimes their husbands staking their claim for a share of management, a paradign relatively new to the male-centric family business.

Familial splits
These factors are translating into a threat for the Indian FMB's, resulting in fracturing of the group, sapped synergies, abandoned economies of scale and crises of leadership. With 62% of the country's 50 largest business houses already having entered the second or third generation, splits are perhaps becoming inevitable. This trend started with a prominent split in the Dalmia family in 1952 and became noticeable in the 1980s when the Oswal, Kothari, Sri Ram, Singhania and Bharat Ram families split. In the 1990s, it became a regular phenomenon with splits in the families that controlled some of the biggest corporations in the country: Ranbaxy, Chhabaria, Apollo, Mittal, Walchand, Bhartia, Thapar, Bangur and Bakeman.

FMBs in India are realising that the ostrich principle does not work – ignoring a problem won't make it go away. Forcibly preventing conflicts that may lead to splits will not serve either the family or the business well. What is required instead is succession planning within the ranks so as to prevent internecine wars or morale-sapping struggles for power. For instance, the Rs800 crore* (€185 million) Dabur India group appointed management consultants a few years ago to chart out a strategy for its inheritors.

In India, splits have goaded growth. The trend indicates that groups that have split outperformed those that have not. When the three Goenka brothers split in 1979, the sales of each truncated group were Rs70 crore. From this modest beginning, RP Goenka constructed a Rs6000 crore group and GP Goenka assembled the Rs2500 crore Duncan Group. The third brother did not do as well comparatively, but the sum of the parts is definitely more than it would have been had the brothers stayed together.

Management of the fall-out of the splits has not been an Indian business family's stronghold. Nor has a contingency plan been kept in mind for carving out the family empire in such an eventuality. When the split is primarily a result of conflict within the family, it is not possible to create alternative avenues of growth for different members without endangering the core group. Thus, the protector becomes the destroyer. A striking example of this is the division in the Modi Group of companies, one of the country's largest industrial houses. A settlement drawn up in the late 1980s to divide the various group companies between two groups of the Modi family has still not been successfully implemented – litigation continues to date. The two groups, which have since split further into sub groups, are backing out of the settlement, claiming bigger slices of the pie in the profit making companies belonging to the group – and no one is willing to own the companies facing rough weather.

Money mismanagement
Another problem that has plagued Indian FMBs is money mismanagment. Indian FMBs have always focused too much on money. In India, money is not power, but money can buy power. Most businessmen are extremely sensitive to the social and political environment and take care not to be seen as being powerful. Politicians, administrators and businessmen in Indian society congregate in mutually exclusive social circles. Power, thus, has little attraction.

Though money is a great attraction in Indian family business, there has never been focus on money management. In smaller businesses, short term gains and profits influence business strategy. There is no planning for the future, no recirculation of money and no investment for the future.

In larger businesses, the problem is even more serious. The bigger projects require borrowing from public financial institutions and banks. Traditionally, the project promoters are required to contribute about 20% towards the cost of the project. The balance comes via public financial institutions and banks, and from the public at large in lieu of equity offered to them. Though the stake is only 20%, the control on money is virtually 100%. The approach is to run the entire business at the risk of the 80% that comes from the outside. Very often, the promoters take away their 20% as soon as the disbursements are made by the financial institutions. This 20% and the major chunk of the remaining 80% is siphoned away or sometimes, even legally, poured into other privately-held family businesses. In some extreme cases, the money meant for working capital is even used to provide luxuries to the promoters and to finance their and their family's overseas holidays. Needless to say, there is no contingency plan. Thus, the businesses are very vulnerable. In such a scenario, even a non-event such as a modest shift in tax policy or variation in demand for a product can cause a major setback to the business.

Possession and emotion
It is quite natural for families in business to be possessive and emotional about their business and assets. Over the years, a strong bond is woven between the family and business. Apart from the fact that the family's social standing becomes linked with its business, family members also see it as a symbol of the older generations that struggled to build the business.

Unfortunately, this emotional tie can only end up working to their disadvantage. For instance, if a business, despite possessing the potential to do well, is not faring well for various reasons (such as lack of adequate funds, loss of creditors' confidence in promoters, mismanagement), the promoters are not prepared to walk out to make way for new management or even induct another partner who is willing to bring in money. The reason for this behaviour is that they can not comprehend a situation of sharing business with an outsider.

When companies with an eroded net worth approach the Board for Industrial and Financial Reconstruction (BIFR – a body of experts set up under the Sick Industrial Companies [Special Provisions] Act, 1985), seeking measures for their revival, often every effort of the BIFR to explore revival by change in management is resisted.

However, the professionally-managed companies are realising the need to be more realistic. Mr Parvinder Singh, the CEO of Rs1261 crore Ranbaxy Laboratories has been quoted to say, "Tomorrow, if I am not capable of handling the company, I had better pull out. Being the highest shareholder I will be the biggest loser if the company suffers because of me".

Mudslinging and criticism
Traditionally, creditors have always looked upon family businesses with suspicion. Yet, they cannot help but finance them as they form a major chunk of India's economy. Unfortunately, they have taken the failures of FMBs as a matter of course. They have adopted a very passive approach and remained mute spectators to family disputes. This policy of washing their hands of the problem -– terming it as an internal family issue – has faced criticism. No initiative has been taken by them to deal with the problems related to this phenomenon of family business. One reason for this has been to avoid accusations of taking sides within the family. Since most of the leading financial institutions are publicly held and the banks are nationalised (with the government seen as their controlling body), maintaining a safe distance from internal disputes is seen as a compulsion.

There have been instances of mudslinging against the financial institutions that have come forward to help. One such case is the Modi family dispute. There, the chairman of Industrial Financial Corporation of India (IFCI) was appointed as a mediator to implement the settlement reached between the two Modi family groups wherein various group companies were divided between them. Since about Rs2000 crore of public funds were at stake, the chairman of IFCI agreed to act as a mediator. When he gave his decision, one group challenged it in court, making serious allegations of bias against the chairman of IFCI. This eventually dragged him to court and forced him to file affidavits.

The up-side
A stage has been reached where the family owned businesses have become the least preferred employers. People perceive uncertainty in career development in family owned businesses, a level of transparency that is below average and think the businesses compare poorly on leadership qualities. However, the fact remains that FMBs have been the vanguard of the economy for about a century. The family business dominates the private sector in terms of number and performance. It has grown faster than the rest of the economy and forms the majority of India's industry in terms of numbers, investments, profits and most of the other quantifiable numbers. The private sector has rarely taken pride of place in the literature of Indian industry and its achievements were barely mentioned in the planned economy regime that dominated Indian industrial growth ever since India attained its independence.

Government policy has kept the private sector out of most critical sectors of the economy and its contribution to national industrial and service products has not been proportional to its numbers. The large infrastructure and core industries sectors remain largely the monopoly of the government-funded public sector. These companies are much larger than the family managed businesses and perform very poorly compared to private sector businesses. The public sector has been marred with controversies and surrounded by corruption. The public sector includes some of the largest and most prestigious sectors in oil, gas and other core industries. However, they have been termed 'unprofessional industries' because they have not been able to exploit the large resources at their disposal. Too much government control has added a bureaucratic touch to the running of these companies.

Morale booster Recently, there has been a serious rethinking regarding the potential of the private sector companies. There is a realisation that the country's infrastructure can be managed better by some of the leading companies in the private sector. FMBs like the Ambani's, Lalbhais, Ruias, Premjis and Bajajs are considered to be India's best managed business houses and have the ability to handle the infrastructure and core industry much more professionally than if run by the government.

As a result, the Government of India has recently reviewed its industrial and investment policy and has decided to disinvest its equity and control of many public companies. Already, the Government has divested its share holding in its Rs1000 crore Bharat Aluminium Company Ltd, one of the largest aluminium producing companies, in favour of the Aggarwal-controlled Rs3000 crore Sterlite Group. Air India, the state owned international carrier; SAIL, the largest steel manufacturing company; Indian Oil Corporation; Oil and Natural Gas Company; and other core and infrastructure industries owned by the Government of India, both profit and loss making, are at an advanced stage of disinvestment. The state governments are also selling off their stake in state-controlled electricity boards to the private sector. Undoubtedly, this is a big morale booster for the FMBs.

Indian cultural values give Indian companies a markedly different flavour. The difference reflects the hierarchy and values of the controlling family. Indian FMBs are very image conscious. The image of the business directly reflects on the family's reputation and their social standing. Similarly, the family's social standing provides added respectability and advantages to the family's business. Therefore, the two biggest strengths of Indian business families are understanding of the environment and image.

Another strength is the ability to settle disputes without resorting to litigation. The community looks poorly on families that take disputes to court or outside the community. There is great pressure from the community to settle disputes through negotiations and if necessary through arbitration by a community network of associates, friends and relatives. Take the following classic, true example. A dispute arose between two members of the National Stock Exchange of India, both from the same family. In accordance with the Stock Exchange Rules, the dispute had to be solved by way of arbitration. A retired Judge of the High Court was appointed as arbitrator. Both the parties however, approached the arbitrator with a request to appoint a panel of their four common relatives to settle their dispute and requested that based on their decision, an award based on settlement may be passed. The four relatives gave a decision and the arbitrator passed an award based on settlement.

Western research indicates that 70% of firms fail to reach the second generation. Some of these losses are due to lack of successors. In India, however, things are very different. There are four major stake holders in the family firm: (i) the family members who own the firm and see it as a source of identity, income and social bonding; (ii) the managers who see the firm as the source of professional advancement and livelihood ; (iii) the workers who see it as a source of stability and livelihood; and (iv) the rest of the society, which sees it as a social and economic institution. The continuance of the firm is seldom in debate among those connected with it. Even if the family members want to shut it down and liquidate its assets to get their shares, other stake holders don't let it happen.

A need for change
The evolutionary context of business is crying for the involvement of the Indian business families to change. A typical family business goes through four stages in its development: entrepreneurial; functional; process driven; and market driven. Still mired, for the most part, in the first and second stages, the Indian family business house must, of necessity, progress to the next two phases. And more importantly, it is the family that must initiate and implement the changes. The family must appreciate the distinction between the environment of two separate systems and withdraw to prevent conflict between the rules and expectations for behaviour in each system. The owner is in the process of changing its role to goal setting and governance rather than being involved in day to day operations. For instance, in 1997 Vikram Lal set a precedent at the Rs1000 crore Eicher Group by renouncing all his executive posts, despite holding about 70% of its equity. Instead, he chose to head a supervisory board that was to guide, but not control, the group companies. The Goenkas of Rs6000 crore RPG Enterprises have also shifted their focus to governance and not to day to day running of the organisation. Anil and Mukesh Ambani, the sons of Rs10, 000 crore Reliance Group CEO Dhirubhai Ambani, prefer to use their expertise not to overrule the ideas and efforts of their managers but to use it as a tool for communication between intellectual equals, to weigh the merits of managerial decisions.

Forward-thinking patriarchs
This change in traditional business methods was influenced by a few forward-thinking partriarchs in the 1970s. At that time, they began sending their sons to business schools in the US. This move not only earned respect from their executives, but it also began a process of much needed professionalism. Today, the strategy is being extended to another level. The executive's respect can not be earned by owning money and being the boss. Rather, the families are expected to know a lot about their industry. For example, it is a point of honour for a family member of Mafatlal, one of largest family managed textile industrial houses, to walk around the weaving shed discussing counts with the master. Rajiv, Rahul Bajaj's son, worked on the shopfloor of a competitor for a year, gathering work experience before joining the family-controlled Bajaj Auto. It can go even further: Rahul Bajaj went to the extent of living in the factory complex. No one expects the executive to out-do or out-know his employees, but it certainly helps him understand his business and the view point of his employees.

Motivation for change
Given these new priorities, a crucial question for the business family will, of course, be that of motivation. What priorities need to change? The traditional business house has always pursued growth, finding finance for the growth, enhancing the worth of its portfolio, maximising its own returns and establishing firm ownership control. Threatened by survival, however, these objectives can no longer be primary. Instead, pride of place must go to the construction of an entrepreneurial culture, the management of human resources and the orchestration of competitive advantages. The new roles will flow automatically from the pursuit of these changed objectives. Thus, the focus needs to shift from 'what to do' to 'how to do it'.

Even though the past few years have been among the most difficult ones in recent history, more entrepreneurs than ever before are feeling confident enough to embark upon new ventures. A large and growing number of new family groups have appeared on the corporate landscape in the 1990s. Many of these are jostling with the old guard for a leadership position. Fresh blood such as the Nambiars (BLP), Guptas (Lloyd Steels), Jindals (Jindal Strips), Singhs (Ranbaxy), Mehtas (Torrent), Motwanis (Ratnagiri), Dhoots (Videocon) and Premji (Wipro) have elbowed out the former stalwarts such as the Dalmias and Walchands. The robustness of the new groups, combined with the unmistakable vitality in at least a dozen of the older ones, is proof enough that family business in India is not just alive, but kicking. 

Click here >>